Rein in government to slay runaway inflation dragon
While the reality is that Australia’s economy is heading in the right direction, the RBA has not gotten on top of inflation, which is being made worse by spending across all levels of government, writes Warren Hogan.
This has been a big week for Australia. We should not underestimate what a profound shift we have seen from the RBA this week.
The RBA Governor is not only signalling that interest rate reductions are off the table for the foreseeable future but is indicating there is a good chance that interest rates will need to go up next year.
While the reality is that Australia’s economy is heading in the right direction, the RBA has not gotten on top of inflation, which is being made worse by recurrent spending across all levels of government.
It is now time for the governments of Australia at every level to get out of the way of a private sector-led recovery.
The priority must be to cut back on recurrent spending across all levels of government to allow this private sector investment to expand the capacity and effectiveness of our economy.
The longer they delay, the more inflationary pressures will grow.
Inflation has not returned to the target band of 2 per cent to 3. Sadly, it is now rising again.
In August the RBA forecast underlying inflation to be 2.6 per cent in the current quarter. The strong September quarter and October monthly inflation results mean inflation will be much higher. Headline inflation is likely to be 4 per cent and core inflation could be as high as 3.5 per cent.
Whether or not the RBA should have cut interest rates this year is secondary to the main game.
The real learning is that the RBA needed to be more aggressive in their fight against inflation in 2024. They never got the interest rate up high enough in the first place.
This week the RBA Governor assured us that the Monetary Policy Board takes this inflation resurgence seriously. That’s good news.
The bad news is this means a short sharp increase in the RBA cash rate, and hence mortgage interest rates, will likely be required over the first few months of 2026.
As a priority they must reverse the 75 basis points of rate cuts from this year. The concern I have is how much higher rates might need to go beyond the 4.35 per cent level seen in 2024.
If a 4.35 per cent cash rate did not get inflation under control in 2024, do we have any reason to think that a 4.35 per cent cash rate will do the job in 2026?
The future is unknown and anything could happen. But the flip side of an economy that is growing and investing for the future is an interest rate that will likely need to be higher. Just how high nobody knows. But the lesson of the last two years is that to underestimate inflation and what is required to get it under control is dangerous.
The last thing we need in the Australian economy of the 2020s is a situation that we found ourselves in 1989 with cash rate of 17.5 per cent and the recession we “had to have”.
The sooner and more concertedly they act, the more chance we can get inflation back down without the cash rate rising above 5 per cent.
Warren Hogan is economic adviser at Judo Bank and Managing Director, EQ Economics
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